Is Bitcoin a potential weapon of mass

economic destruction?
Bright graduates who create electronic currencies may be as dangerous as unregulated traders
before the financial crisis

The Bitcoin Wallet smartphone app. Some businesses are accepting the virtual currency, but
should they be doing this? Photograph: Bloomberg/Getty

Comments

115

Phillip Inman, economics correspondent

Thursday 28 November 2013 16.02 GMT First published on Thursday 28 November 2013
16.02 GMT

Why are we giving Bitcoin house room? Surely it is akin to a counterfeiting scam promoted by
people who like the idea of their computer making them rich without lifting much more than a
finger?

The story on Wednesday of the Newport IT worker James Howells who threw away a hard drive
with 4m worth of Bitcoins stored on its memory is a case in point. If Howells had set up a
printing press in his bedroom and run off a whole bundle of banknotes, only to throw away the
suitcase he stored them in, sympathy would evaporate and the police would pay a call.

Of course, Howells is no fraudster, yet somehow, because he generated the money based on
computer programs designed in the hallowed confines of Silicon Valley tech offices, the process
is deemed, at least by some people, as a legitimate way of generating funds.

As an article by my colleague Alex Hern described earlier this week, Bitcoin is being taken
seriously in the US Congress, by US central bank boss Ben Bernanke and by some larger
commercial businesses, notably Virgin.

So why do we need Bitcoin? Is there something about existing currencies, or even the lack of a
global currency, that makes Bitcoin attractive? Likewise, is there something about the way we
buy and sell electronically at the moment the speed and the cost that can be made faster and
cheaper by a new electronic currency?

As an aside, these questions reinforce my general view that graduates of Stanford, MIT and
Cambridge to name just three science-oriented universities are potential weapons of mass
financial destruction, adopting the term used by Warren Buffett when asked to describe the
mortgage derivatives behind the Lehman Brothers crash (he said they were WMFDs). Where
once these graduates were small in number and locked in a room with the letters NASA on the
door, these excessively clever people (I didn't say worldly or wise) are now appearing in their
millions, bored and restless and in search of a quick way to grab the kind of fortune that buys a
mansion and a big car.

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More central to the argument, the drive to create a peer-to-peer currency that operates outside the
existing authorities and exchanges is the same one that encouraged investment banks to devise
peer-to-peer trading platforms away from the central exchanges in London, New York and
Tokyo. These exchanges were deemed to be slow and subject to excessive charges. They were
regulated by government or quasi-government agencies and sometimes subject to taxes.

When governments refused to back radical reform, the JP Morgans and Citibanks took their
trading to these so-called dark pools where no regulator could see what was going on.

Five years after the financial crisis there is still a debate about size, scope and legitimacy of a
global trade that the Bank of England's deputy governor Charlie Bean has said could create "a
serious problem".

Regulators say they are worried about the growth of shadow banking as much in China as in the
US and Europe (China has its fair share of restless, clever graduates). They should be equally
worried about Bitcoin.

Regulation is annoying and banks can charge too much for processing transactions, but that is not
a justification for a shadow currency with the potential, should it be allowed to proliferate, to
wobble and crash.

The Bitcoin early adopters and the people who are currently using computer programs to "mine"
Bitcoins want a new currency so they can make trading profits from doing nothing other than
trading. There is no higher motive. In the early days of its operation individuals can go bust so
who cares? They took the risk of a collapse in the currency's value (so far it has only gone from
$1 to $1,000 in its five-year life). But once institutions are trading with other people's money
pension money then it becomes serious when losses occur. Before you know it there will be a
clamour for regulation and the regulators will impose charges to cover their costs, place
restrictions on trading and possible apply a tax. And the reaction from the Bitcoiners? Start
another currency.
We often talk about the brightest graduates turning their backs on manufacturing and engineering
in favour of banking. They still do but there is not enough banking to go round for the star-
studded students of today and tomorrow. Left to their own devices, and without being channelled
into more productive activities, of course they will print new money if, in our ignorance, we all
say it is OK.

In the meantime, businesses should shun the currency. It is no surprise that Virgin boss Richard
Branson, who loves to pose in anti-establishment garb, has embraced Bitcoin. That does not mean
anyone else should. Shareholders should demand real money in exchange for goods and services,
for the good of society at large.

As Paul Krugman, the Nobel prize-winning economist, wrote more than two years ago: "What we
want from a monetary system isn't to make people holding money rich; we want it to facilitate
transactions and make the economy as a whole rich. And that's not at all what is happening in
Bitcoin."

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Bitcoin sells out

Arwa Mahdawi
Once seen as a force for good, digital currency Bitcoin is going mainstream with its own 1% of
millionaires such as the Winklevii
'Those who invested in Bitcoin early are now protecting their investment by ensuring that Bitcoin
becomes "too big to fail".' Photograph: Luismmolina/Getty Images

Comments

74

Wednesday 3 July 2013 16.32 BST First published on Wednesday 3 July 2013 16.32 BST

If you drew a Venn diagram of anarchists, strippers, and identical twins, one of the few points of
intersection would be the digital currency Bitcoin. Famous for not being the face of Facebook,
the Winklevoss twins appear to be intent on divesting the currency from its countercultural past
and transforming it into a new asset class for investors. This week the Winklevii, as the twins are
collectively known, filed proposals with US regulators for a fund that would bring "Bitcoin to
Main Street" by making speculation in the currency easier.

It seems highly unlikely that regulators will allow the Winklevoss Bitcoin Trust to ever see the
light of day. However, the fact that such a fund is even being touted points to the way in which
Bitcoin's gradual assimilation into the mainstream is simultaneously divorcing it from its
potential to be a truly democratic form of money.

Bitcoin is not just a new way of exchanging value, it is a way of promoting new values. It is an
ideological enterprise: a decentralised currency controlled not by governments or by banks but by
people. Back in March, when I was still starry-eyed about the potential for Bitcoin as a force for
social good, I ventured that virtual currencies were no longer just a jazzed-up form of Monopoly
money but may well be the thing that ends the monopoly on money. The wealthiest 1% now
control 39% of the world's wealth, and just five banks hold more than 90% of all derivatives
contracts a $700tn market. Our monetary system is ripe for disruption.

Bitcoin now appears to be simply reinforcing the status quo by producing a new 1% of Bitcoin
millionaires. The Winklevii are among these. Back in April they revealed they own around 1% of
all the Bitcoins in existence, worth about $11m. The value has now decreased slightly and their
share probably sits at a paltry $10m.

Money is only worth anything if enough people believe it worth something. Those who invested
in Bitcoin early are now protecting their investment by ensuring that Bitcoin becomes "too big to
fail". As there is a strong correlation between Bitcoin-related buzz and the value of Bitcoins, this
involves maintaining a conversation around the currency. Which involves tactics designed to grab
mainstream press attention. Like, say, filing plans for a highly speculative Winklevoss Bitcoin
Trust. In the interests of full disclosure, I own 0.0001 Bitcoins, so rest assured that commenting
on this article will not buy me a yacht. Not even a dinghy, actually.

Ensuring Bitcoin remains a viable investment also requires building up infrastructure around the
currency, and venture capital money is flowing into start-ups doing just that. In May, Union
Square Ventures led a $5m funding round in Coinbase, an online platform that allows you to buy,
store and pay with Bitcoin. In the same month, another venture capital fund, Liberty City
Ventures, announced a $15m commitment to Bitcoin and other digital currency startups.

As Bitcoin grows in value, an emerging elite are wielding inordinate amounts of control over the
currency's future and are essentially becoming a de facto centre. A regular Bitcoin user may not
be outsourcing their trust to the government or a central bank when they use the currency, but
they're not exactly outsourcing their trust to people just like them, either. The principle of
decentralisation sits at the very heart of Bitcoin, but this is being diluted by the currency's
success. To mangle Yeats: "Things fall apart; decentre cannot hold." Bitcoin was once a
revolutionary currency on every level. However, it now looks as if the revolution has been
monetised.